Matt: " IAI never traded at a PE of 1 before. I don't know if any of it's competitors trade at a PE of 1, if so let me know. This sounds like deliberate misinformation Sid. SHOW ME AN EXAMPLE OF A SIMILAR SITUATION!"
I am not saying that it WILL sell at a P/E of one, even if most people know that earnings will disappear soon after 1/1/00, I am saying that it SHOULD sell at that price. Forget the stock market, just think of it as a transaction that you might be offered: Suppose someone offered to sell you his business which had a limited future, say, selling beer at the last ball game of the season, before the team moved out of town. He can prove to your satisfaction that he will make $500 that game.
How much would you pay him to buy out his business? Ten times earnings, or $5000? No. Three times earnings, or $1500? No. What about one times earnings, or $500? No, I don't think you would even pay that, because he would get the money and not even work and you would be working for nothing. Depending on your financial situation, the value of seeing the game for free, etc., you might pay him $100 or $200 for that business, or well under one times earnings.
That isn't crazy or even irrational. So why is an extremely low multiple of earnings which are very temporary so crazy?
I think you are absolutely right about the road map beyond 2000. If IAIC can demonstrate that it has something proprietary, that it is more than a random collection of computer professionals, that it has something that it can sell at a decent margin after 1/1/00, then the stock could be a great buy. If not, then expect to be very frustrated in 1998 and 1999 as the company reports great earnings but no one wants to pay any multiple for them. |
